As a UK business considering expanding to the US it is essential that you understand that tax obligations and implications you will incur as a foreign business in the US.

EIN and Form 8832

Before any forms are completed, the firm must obtain an Employee Identification Number (EIN) from the IRS. When this happens, the IRS will automatically designate the company as either a corporation, partnership, or disregarded entity with one owner. From there, the foreign company should fill out form 8832 to either confirm this classification or elect a different one.

W-8 Forms

The most important step in this process is filling out one of the W-8 forms. This type of form acknowledges that the foreign company intends to take advantage of the tax treaty they have with the US, and therefore will see the 30% withholding tax reduced. For UK businesses, this rate is reduced to 0%, so they should not have to pay any withholding taxes on payments received from US businesses. This applies to a wide variety of income types, including interest, dividends, rents, royalties, premiums, annuities, and compensation for services. In most cases, the company making the payment or the IRS will tell the firm which form to fill out. Usually, foreign entities will fill out W-8BEN-E while partnerships will use W-8IMY.

Setting a business up in a physical location of the US

If the UK company decides to set up a physical location in the US, they will be subject to US corporate tax. The firm should file form 1120 and pay the tax to the IRS. This income should also be reported on the UK tax return. However, they may file for double tax relief under the UK/US tax treaty and reduce their UK tax liability by the amount of US tax paid. If the company does not have a physical location in the US, they do not have to pay US Corporate Tax.

Form 1065

Additionally, the IRS may request that a company entering the US provide records of their income and expenses for past years. This is commonly done using Form 1065, and is strictly for reporting, not tax, purposes.

By following these steps, any UK business can efficiently begin operating in the US while minimizing their tax burden and remain in accordance with all US tax laws.

Following President Trump’s signing of the Federal tax bill on 22nd December 2017, the effective lifetime Estate and Gift Tax exemption for US citizens and residents (domiciles) has been increased from $5.49m in 2017 to approximately $11.2m per individual (approaching $22.4m for US citizens or US domiciled married couples) with effect from 1st January 2018. The inflation adjustment factor has not yet finalised.

If you own a UK limited company and move to the US as a corporation, you may seem inundated by all the complex tax laws to follow and forms to fill out. Here is a brief guide that should help clarify the purpose of these forms and how to properly complete them.